Chapter

Discussion

Editor(s):
Mohsin Khan, Morris Goldstein, and Vittorio Corbo
Published Date:
September 1987
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Charles H. Dallara

Executive Director

International Monetary Fund

I see my task as a discussant this morning in three parts: first, to offer a few of my own personal reactions to Professor Sachs’s paper; second, to stimulate some further thought and exchange of ideas on this paper; and third, to leave enough time for that exchange to take place.

First, I found the paper very interesting, very thought-provoking. My effort to respond to some of the points this morning might have been made a bit easier if I had perceived in the drafting of the written text the same degree of humility which Professor Sachs stressed this morning in his oral presentation. I think he is correct—we must bring “genuine” humility to these issues in forming our judgments and in reaching what sometimes appear to be rather definitive statements about these issues.

There are a few points in the paper, and a thesis in the paper, with which I can agree. That is that reducing fiscal imbalances, particularly in the Latin American economies, is a matter of the highest priority. The paper says that “without the necessary fiscal actions, no extent of exchange rate devaluations or trade liberalizations can stabilize the economies of Latin America.” I have no difficulty with that statement nor with the thesis which runs through the paper that fiscal action is essential. I also can agree that liberalization may well not succeed, or it certainly will not make major progress in many cases, in the midst of substantial macroeconomic instability. I also have no difficulty with the view, which we observe regularly in the Fund, that governments cannot be asked to do everything at once. In addition, I think that we must recognize the validity of his point that the policies of Japan and the Republic of Korea some decades ago, and even in some respects today, are not characterized by the free market orientation that sometimes is associated with those programs.

Aside from those points and theses, however, there are themes in the paper with which I have rather fundamental disagreements, particularly the notion that liberalization and stabilization should not proceed hand in hand, but that macroeconomic stabilization should precede liberalization—particularly trade and exchange rate liberalization.

The following points briefly illustrate why I cannot find much with which to agree in that view.

First, I don’t find the experience of the East Asian countries in the 1950s and 1960s particularly relevant for how Latin American economies should respond today. This is due in part to factors similar to those that Professor Sachs himself noted in his paper and in his oral comments yesterday. For example, in commenting on the comparisons drawn between Turkey and Latin America, he noted that the labor market environment in Latin America is very different from that which existed in the early 1980s in Turkey, where labor unions were not a powerful force. The same applies to the Asian economies in the 1950s and 1960s when labor unions were generally not an important factor. Clearly, unions must be reckoned with in any consideration of Latin American stabilization and liberalization today.

More generally, however, it is the change in the world economy that I think makes it particularly difficult to draw relevant conclusions from the East Asian experience and apply it to Latin America today. Not only do we have much slower growth in the world economy and in world trade flows, but we have economies which in Latin America are primarily dependent on international capital markets for their external financing. This certainly was not the case in Japan, the Taiwan Province of China, or the Republic of Korea in the 1950s and 1960s.

That means that the Latin American economies must be concerned with private market creditworthiness, and that in turn means that they must be concerned with competitiveness. These countries must focus on policies which can stimulate confidence in international capital markets. Certainly the international banking community has left little doubt in the last few years, as I suspect we will hear again today, that liberalization of certain aspects of the economies of Latin America is perceived as critical to maintenance of creditworthiness on the part of many of these economies.

A second general point relates to the need for liberalization to facilitate fiscal adjustment. It seems to me that perhaps inadequate attention was given in the paper to the need for liberalization to help achieve the objectives of a stable and lasting reduction in fiscal imbalances.

It can be difficult to achieve substantial reductions in fiscal imbalances while simultaneously eliminating trade-related sources of revenue. But we have a recent case, Chile, which in the last few years has managed to reduce its trade-related sources of revenue without compromising substantial progress in reducing fiscal imbalances.

This suggests to me that one of the key areas of liberalization that was not addressed in the paper and that may need to accompany redressment of fiscal imbalances is the process of tax reform. At the same time, one cannot hope to create a lasting and legitimate revenue base without a relatively rational investment structure in these economies. And it is difficult for me to see how one can move toward a more rational structure of investment in Latin American economies without a more open trading regime. The history of Latin America, as well as of many other economies, is that investment in the context of substantial protectionism and in the context of substantial government subsidies may well not be the most efficient pattern of investment.

In addition, price liberalization, and liberalization of state enterprises generally, can and must be in many of these economies an important component of fiscal redressment. The need, for example, to improve the management and, in some cases, to privatize must be seen as important components of a long-run move to fiscal stabilization that will have a lasting effect.

Perhaps the fiscal progress that was achieved in the early 1980s in some economies in Latin America, such as Mexico, did not last not only because there were political pressures, but because in some cases fiscal adjustment was not accompanied by major fundamental reforms in parastatal pricing and management techniques. Such reforms might have facilitated a more lasting improvement in the fiscal positions.

I have some difficulty also with the notion that the emphasis on liberalization is part of crisis management and that there is an expectation inherent in the current debt strategy that everything could be accomplished at once. I think we could all agree that in a sense a crisis persists in many of the Latin economies, and yet the emphasis in the Baker Initiative is not to try to liberalize everything at once, but to move forward in a number of complementary areas. In many of the programs that come to the Fund Board, and I believe many that come to the Bank Board, there is a clear sense that the process of liberalization, particularly trade liberalization, must be gradual. I don’t recall one case of trade liberalization that the Fund Board has approved that has not been preceded by study after study, by marginal step after marginal step, and I think it is fair to say that in many of the cases one now sees on the part of the authorities themselves some degree of regret that the initial steps toward liberalization might not have been somewhat more aggressive.

Liberalization can provide a more lasting basis in some cases for sustainable growth than can fiscal deficit reductions alone. It is clear that the process of political dynamics in many Latin American economies makes it possible to achieve substantial reductions in fiscal deficits during a period of time. But it is also possible, as we have seen, for the progress in that area to dissipate and for fiscal deficits to return to substantially higher levels.

While there have been numerous instances where trade liberalization has been partially reversed, the degree of reversal that generally occurs with trade liberalization is less than the degree of reversal that has often occurred in fiscal adjustment. Progress in that area might be somewhat more lasting.

There is a notion in the paper, and of course it is one that is widespread, that there is a certain fatigue in the debtor countries with the adjustment process. That, I believe, is an entirely legitimate and valid point. And when I begin to wonder why that fatigue exists, it appears that in part it exists because in some cases there has been a perhaps excessive emphasis on fiscal, credit, and, even in a few cases, exchange rate adjustment. Of course, those adjustments were necessary, and should have received substantial emphasis, but in the absence of appropriate liberalization measures, such as other expenditure-switching policies that might have enhanced the capacity of the economy to move into the tradable goods’ sector and might have increased the overall level of productive capacity, these measures were relatively less effective. And too much of the burden of adjustment was carried by reductions in absorption.

It is perhaps, therefore, not surprising that in an environment where the emphasis has been on the reduction of absorption that adjustment fatigue has emerged. And I would hope that an adjustment approach that is more broadly based on liberalization, as well as fiscal and credit adjustment, would reduce the pain of adjustment.

Let me make just a few last points. First, I was somewhat disappointed to see the support for unilateral debt moratoriums, although Professor Sachs did make it clear that he believes that debt relief most appropriately occurs in a cooperative context supported by the Fund and the Bank. What I find puzzling in his position is that substantial—one might consider massive—debt relief has occurred in the context of Fund and World Bank-supported programs. Indeed, I think something in the order of $168 billion in medium-and long-term debt relief has been provided by the private banking community alone in the four-year period 1983-86; $63 billion has been provided by the official creditors.

I think it is a misreading of what Secretary Baker and others say to suggest that he believes, or others believe, that adjustment is simply a matter of countries pulling themselves up by the bootstraps alone. Two critical components of the Baker Initiative were the need for the commercial banks to continue to provide substantial and increased support for growth-oriented economic programs and the need for the multilateral institutions to continue to play important roles. In this connection, it was recognized that the World Bank should play a strengthened role.

In the case of Bolivia, it seems to me that perhaps there are a few facts in the Bolivian case—and I am not the expert that Professor Sachs is here—that need to be stressed. First of all, Bolivians did not entirely stop servicing their debt. They have continued to service multilateral institutions through the entire period, and that is an important distinction between Bolivia and Peru. The Bolivians also continued to service their Paris Club creditors on at least a partial basis, even when the Paris Club was not particularly expecting to receive continued debt service.

C. David Finch

Director, Exchange and Trade Relations Department

International Monetary Fund

In commenting, I am faced with a broad task. The intent in holding the seminar was to see what advice, in a sense, could be given to us and through us to our members on how to get better growth and better results in the current world environment. This particular session was to focus on the degree to which openness in trading and competitiveness in exchange rates were to be a feature of programs that encourage growth.

In that respect, I felt Mr. Bhagwati’s paper set out the issues very comprehensively, and I have very little comment to make. I think his remarks are going to be a very useful part of the record and should be closely studied by countries that have the problem of how to grow out of the difficulties which they currently are in.

Professor Sachs’s paper, I felt, was more addressed to the Fund staff and to U.S. legislators and was attempting to deal with much broader issues. I have sympathy for many of the points that he makes. I like the emphasis on fiscal adjustment. It is an issue on which the Fund has been way out in front, and it is welcome to see that point made. I felt, though, that his way of putting the issue was muddied and to a degree was, as I remarked to him before the meeting, mischievous. Thus, while as mentioned I like the emphasis on the fiscal issue, that is not all there is to growth, as Mr. Dallara has remarked. It seems to me that growth has to come out of countries’ linking themselves more effectively into the world economy.

There are two issues in this regard. One is the exchange rate, and the other is the degree of liberalization—the stance of trade policies. On the exchange rate, I think that Professor Sachs on the whole wants to emphasize much the same issues as we would. I think he believes it is critically important to correct overvalued exchange rates, and not, as it were, to try to force water uphill. Exporters should be adequately rewarded for producing for outside markets. Although I think Professor Sachs is firmly supportive, this is not quite apparent in the way he put it when he talked of Japan having had a 60 percent appreciation, and still achieving an enviable record of exports. This gives an impression that I think is completely wrong for most of the countries that are trying to find ways out of their current problems. We would want to stress very strongly the importance of getting the exchange rate right for effective linking with the rest of the world.

On liberalization he raises the interesting and important point, that government has a responsibility in this area. Linking to the rest of the world is not going to work simply by decreeing an opening up of the economy. It needs supporting government policies and a willingness to accept the transitional costs of creating an environment in which exports will grow.

Professor Sachs notes how helpful it can be to have an efficient government export promotion mechanism. But, of course, for the majority of developing countries, such a mechanism does not exist. There isn’t the equivalent in most of these economies of the institutions in Japan that are able and ready to be effective in encouraging the exporters and export sectors with the most growth potential. It is conceivable perhaps that Brazil has had a better focus on this issue than most of the rest of Latin America. But the tendency—as I think Professor Sachs would agree—in most of Latin America has been more to emphasize import substitution, to use the machine in nonconstructive ways.

In such cases, it is unrealistic to say that there is another model. The question is whether the right conditions and the orientation in those countries can be fostered by a government machine. It is our view—and I think that Professor Sachs on the whole would support that—that there is a need in these cases for liberalization so that market forces can create the right incentives for realizing the countries’ growth potential.

As I say, the whole purpose of this symposium was for us to receive guidance, but I would want to stress that there are two points on which we in the Fund are constrained. The Fund and the Bank—the Fund perhaps more particularly—have a responsibility to foster open trading, as the Articles state. It is not conceivable that the Japanese model could work for the world if everybody tried to follow it, and I think it’s necessary for the Fund and for those gathered together in such international meetings as this to stress that the more we can foster growth by open trading, the better the chance for the world. It is not something that we can be neutral on. I think it is incumbent on us to press for open trading to see that everybody is given a reasonable chance.

A further point that also influences us in this area: we are dealing as trustees of repayable funds. We therefore have to be thinking of the export possibilities, of countries finding ways of earning the money to repay, to keep the funds revolving. It is not, as I felt Mr. Helleiner was saying yesterday, that we are operating with public funds that can be given away. In providing resources to promote world welfare the Fund does have to worry particularly about the recovery of countries’ external accounts, and that means that we have to stress the importance of export-led policies in promoting growth.

Attila Karaosmanoglu

Vice President, East Asia and Pacific Region

World Bank

Professor Bhagwati has given us a fine and provocative paper. Broadly, he has defined a measure of outward orientation; presented the empirical evidence that links rapid export growth with rapid economic growth; presented the theoretical justification for believing this link can be explained by economic behavior; asked whether recent protection represents a reason for retreating from an outward-oriented strategy; explained why developing country governments should take an activist negotiating stance on trade barriers.

For a “practitioner” like me, Professor Bhagwati’s approach facilitates comment in two key respects. First, the paper recognizes that theory, not correlations, defines policy options. It shows great concern to find a sound microeconomic foundation for the correlation we observe between export growth and economic growth. For us practitioners, the theoretical basis is crucial. The weaker our understanding of the microeconomic forces at work, the weaker will be our policy advice. Indeed, outward orientation could be misunderstood to mean export maximization, that is, countries might hope to grow by giving their exports away (not, unfortunately, a contrived example).

Second, the paper recognizes that policymakers must act even when faced with imperfect economic models and incomplete information. Those not responsible for policy can speculate and investigate until they are satisfied; then they can recommend action. Those responsible for policy, though, are held as accountable for not acting as they are for acting—a tax is either lowered or not lowered, a quota is either removed or not removed. So it is immensely important that investigators like professor Bhagwati are willing to say essentially, “Look, we don’t know everything and we are even missing some important things, but we probably know enough to go more safely in this direction than in other directions.” It is, perhaps, unacademic for him to take this risk, but it marks the difference between a paper valuable to a practitioner and an intriguing but abstract exercise.

Professor Bhagwati moves us ahead of a naive adoption of a simple neoclassical, laissez-faire, no-externality interpretation of openness. He introduces the possibility of success of an “ultra-EP” strategy, the possibility that differentiated incentives may be useful (he advises watching the average incentive, not the dispersion around the average). He permits some unequal treatment of foreign investment, and, broadly, allows a larger constructive role for government.

I will first make a few remarks about where my own emphasis lies in trying to link outward orientation and growth. Then I will turn to a lengthier treatment of government policy, because despite Professor Bhagwati’s expansion of the appropriate scope for government, government policy still remains too small and insufficiently spelled out operationally. Finally, I will touch on what we do not know—the unsettled questions that represent the weak links between our economic logic and the advice we give.

Potential That Outward Orientation Creates for Growth

As Professor Bhagwati and others have noted, current economic theories can explain why an outward-oriented strategy can produce a jump in output, a rise in efficiency. These same theories do not, though, adequately explain why outward orientation increases growth rates. For my part, much of the reason outward orientation seems to increase growth lies not in the part of trade theory that explains efficiency. Rather, I think it lies in the gray areas that Professor Bhagwati describes, where perhaps art dominates theory, and intuition dominates induction.

First, the industrial export sector is modern in all the vague and broad sense of that word. When a developing country competes against an industrial country outside the developing country’s home market, it can only succeed by “being like them.” A traditional agriculture exists; a traditional semiconductor industry does not. With an import-substituting strategy, though, the developing country takes on the industrial country on its home territory; the pressures to continue modernization decline. Second, an outward-oriented export sector creates an interest group within the country with a stake in sound macroeconomic and development policies. In an open economy, private actors clearly and quickly feel the costs of delaying response to changing international environment. Governments of such countries respond more promptly.

What Government Policies Help Realize That Potential?

Outward orientation works when private decisionmakers face relative prices that reflect the true costs and returns to society of their activities. Outward orientation works even better when governments also align their expenditure and investment decisions with the same set of prices. Then the social overhead capital installed by the government backs up the private capital, conforming to the social price signals really facing the economy.

Professor Bhagwati’s paper takes some important steps forward in spelling out the appropriate role of government in an outward-oriented strategy. It gets us away from laissez-faire prescriptions that these countries ignore anyway. It begins to lay the groundwork for permitting us to advise countries on their policy choices. I would add other policies to his list though.

We should see what outward orientation is and what it is not. It is not a strategy where the government makes production decisions, nor is it a strategy of picking winners. Rather, it is a strategy of making sure that the public policy and investment decisions back the winners chosen by the market.

What does this mean for the advice we give? First, it means get the exchange rate right. Exchange rates need to reflect the likely evolution of export revenues and capital inflows over the private investor’s investment planning horizon. How often have we seen major projects undertaken at overvalued exchange rates, only to prove economically nonviable later at any realistic exchange rate an economy might hope to sustain?

Second, get macroeconomic policy right at the right speed. Make sure that macroeconomic policies aimed at controlling inflation and bringing down external deficits rest on monetary and fiscal policies that do not produce unnecessarily high rates of unemployment and increases in the incidence of poverty. Design adjustment periods over sufficiently long periods in order to minimize short-term losses from adjustment; make sure that some safety net exists to cushion the losses to those least fortunate who are bound to lose during the adjustment period. Without such care, the finer policy adjustments called for in developing an outward-oriented strategy will be sacrificed to the political necessities of dealing with the larger unemployment crisis.

Moreover, as Professor Sachs reminds us, an outward-oriented strategy and such liberalization as produces it are longer-term development strategies. They rarely by themselves constitute an adequate response to an immediate set of problems revolving around current account deficits, debt payments, and unemployment.

Eliminate rules and regulations that impede responses to market signals. We can often redesign regulations to achieve the same equity ends at a much lower efficiency cost. Other regulations serve no equity end; rather they reflect a motley assortment of interest groups, often a hangover from past macroeconomic decisions that may or may not have a correct historical basis, as, for example, the import licensing cliques that flower in the wake of overvalued exchange rates. Elimination and modification of such rules and regulations are often fit subjects for loan conditions.

Fourth, line up public investment and expenditures with the private economic activities that are profitable when the exchange rate is right.

Fifth, promote technology transfer by providing hospitable surroundings to direct foreign investment that aims at exports, not at jumping tariff walls.

Sixth, back up industrial exports with sophisticated government trade negotiations, as Professor Bhagwati points out.

Seventh, and critically, tailor advice to the maturity of the government. Some governments can execute some strategies well; others cannot. The Bank must keep its policy advice in line with the abilities of the government.

What We Do Not Know

In offering up all these guidelines that, for us, define the operations necessary to further an outward-oriented strategy, we need to keep sight of the important point raised at the outset.

We still do not have a good account of how openness produces high growth rates. Without that account, the policy dialogue remains difficult. The world does not conform well to the model that Professor Bhagwati describes. And policymakers in our client countries know this. For policymakers in many countries, what others have done often sounds more convincing than what theory claims.

Countries that have combined high rates of manufactured export growth with high rates of economic growth, as is well known, highly protect their domestic markets. They also subsidize their exports, particularly by providing services, especially finance, priced at rates below the market. Oligopoly, not perfect competition, characterizes their domestic markets. They exploit their home markets and they follow practices that may be interpreted as dumping. Their consumers have, by static economic measures, paid far more for commodities than was necessary. Yet, some grow rapidly. Others emulate what appear to be the same policies and stagnate, just as we would predict.

When we advise the winners, we may assert that they would do even better if they were to adopt policies closer to our idealized outward-oriented strategy. But it is precisely when we assert this counterfactual proposition that we are limited by the tenuousness of the underlying logic linking trade and growth—as Professors Bhagwati and Sachs remind us.

Moreover, even where policymakers share a common model, they might still rationally pursue different policies. Countries assign different costs to different outcomes and to different errors in policy choices—they will have different “loss functions.” Rational policymakers in those countries will make different decisions in the face of different anxieties about the “second type” export pessimism, or dumping, or of differing political costs of unemployment and declines in living standards when they design adjustment programs.

The advice we give about the policies they follow must show sensitivity to these differing concerns. We cannot force countries into common policy molds and still give them useful policy advice. Failing to take account of these legitimate differences in policy choices is not just bad politics; it is bad economics as well.

For the countries of the East Asia and Pacific Region, these issues are not academic. These countries see policies that they think work and they want to practice them. They think they see them practiced by the successful developing countries, and by some major industrial countries—preeminently, though not exclusively, by Japan. Improving our analysis of these issues is the next major item of business.

Mario Draghi

Executive Director

World Bank

The main message of the paper before us is that for the highly indebted developing countries the route to stability with growth is a combination of fiscal balance and of trade protectionism. This message is based on lessons the author draws from the experience of three successful Asian countries: first, stabilization should come before any extensive trade liberalization takes place; second, export growth does not necessarily require import liberalization but can be successfully promoted through other non-laissez-faire means; third, a balanced income distribution makes any stabilization easier to achieve.

The author criticizes the World Bank and the Fund for an excessive insistence that their adjustment programs be based on across-the-board tariff liberalization accompanied by massive real exchange rate depreciations and for their lack of emphasis on effective and lasting measures of fiscal retrenchment.

It would be hard to disagree with Professor Sachs’s main message or with the three lessons he draws from the Asian experience. All these are sensible per se; they do not need any direct reference to reality to prove that they are right. Practical experience sometimes may show that policies, beside being right in the abstract, even can work in the real world. I just doubt that Professor Sachs’s references to the economic history of three Asian countries in the 1960s demonstrate the “workability” of the same policies in Latin America today.

Furthermore, Professor Sachs’s criticism of the World Bank, though perceptive, is somewhat unbalanced and, being based on a very limited set of country experiences and of policy statements made by Bank staff, it cannot be addressed to the general strategy of the World Bank.

Professor Sachs rightly shows how wrong it is to claim that the growth of Japan, The Republic of Korea, and The Taiwan Province of China was the result of laissez-faire policies, and he criticizes policy recommendations to Latin America based on such a wrong claim. But then he seems to transpose mechanically the Asian experience to different contexts in order to suggest policy recommendations of an opposite nature.

First, the differences between Latin America and the success stories of Southeast Asia are so extensive as to make most comparisons unusable for the purpose of drawing applicable lessons.

Second, his criticisms of the policy advice supplied by the World Bank and by the Fund make the point that the monkey-like repetition of routine recipes can be lip service to ideology and a bad joke for the country concerned. But I do not think that the two institutions are guilty of this error. In general, the prescriptions emerging from the dialogue between the countries and the World Bank or the Fund are the product of a pragmatic assessment of real conditions that are unsatisfactory at the time these prescriptions are formulated. Consider for example the issue of trade liberalization. I would unconditionally agree with the author’s view that real exchange rate depreciation and trade liberalization are by no means the only instruments for promoting net export growth. In fact, once we recognize that the world is quite imperfect, we may be more attracted by instruments that are less blind and more selectively efficient in their outcomes, provided there is enough confidence in the country’s ability to administer the complex bureaucratic machine required by the vast array of controls, areas in which the Asian countries have shown an absolute advantage with respect to any other countries in the postwar period.

Like the Asian countries that he mentions, many Latin American countries were, until the end of the 1960s, fiscally balanced, and they had a high rate of trade protection. Still, their GNP and export growth rates were not remotely comparable with those of Japan, the Republic of Korea, and the Taiwan Province of China in subsequent years. Like Japan, they had for some periods of time overvalued their exchange rates, but differently from Japan and, notwithstanding their trade protection, the effect on their trade balance was disastrous. The Bank’s policy advice may have been exaggerated at times, but it was always based on an existing situation that was profoundly unsatisfactory, often so because of policies that on the surface looked like the ones yielding the Asian successes.

The same considerations apply to Professor Sachs’s remarks concerning privatization. He quite correctly points out that one should not refer to the successful Asian countries as examples of small government, since they are even larger than in Latin America. But as there is no reason for a blind support of privatization at all costs, nor is there any reason to keep alive at all costs state corporations that are inefficient and wasteful. Common sense suggests restructuring of public enterprises whenever there is a good case for government intervention, privatization whenever such a case is not there. The World Bank for its part has never rejected, and sometimes even proposed, restructuring of a public enterprise as preferable to privatization.

It goes without saying that land reform and more equal income distribution would be desirable in Latin America, even because, as Professor Sachs points out, they would make more acceptable any macroeconomic stabilization, but the issue is how to enact these reforms. Again, the Asian experience is not helpful. As Professor Sachs notes, most of the land reforms and the related improvements in income distribution were either imposed by military occupation or they were a direct consequence of the war, so that these experiences are not transferable to Latin America in which the main factor of change in income distribution has always been growth itself.

Professor Sachs observes that the timing suggested by the World Bank policy advice may be too tight, threatening the stability of the economy and jeopardizing reforms, and again he refers to the experience of Japan, the Republic of Korea, and the Taiwan Province of China, countries that waited quite a time after full stabilization was achieved before introducing structural reforms.

I would agree that the hundreds of conditions specified in the structural adjustment lending operations often produce an image in their overly broad scope of a big brother descending upon a poor country and laying the grounds for great confusion. In principle we all agree that stabilization should come before trade liberalization and that contradictory policy conditions should be avoided, but it is not at all clear how even these minimal requirements can work in practice. Whether some parts of the structural adjustment turn out to be in conflict with the stabilization program depends on the speed of the country’s response to the measures envisaged and on the development of its fiscal structure. The only generalization that can be advanced relates to the second point: the more developed a country’s fiscal system, the less likely, in order to achieve fiscal balance, the recourse to budget measures that are in conflict with trade liberalization. When such a fiscal system is not in place and, in order to avoid prolonged stagnation, the transition will have to be financed by means other than cuts in public investments and trade taxes. But this is precisely where I do not find the Asian experience particularly useful in today’s context. Its peculiarities are partly brought out by Professor Sachs when he points out the extraordinarily high private savings rates of these countries and the large foreign aid from which they benefited during their transition to export-led growth. Other crucial factors were the sustained world growth and the different international trade situation of those years.

Even the requirement of continued financial assistance, which is rightly included as one of the crucial ingredients in the Asian stabilizations, will have to be rethought so as to adapt it to the quite different Latin American context. Some of the countries that he mentions as examples, way up to the late 1960s, had per capita incomes comparable with those of the poorest countries of the world, so much so that the Republic of Korea was eligible for IDA assistance until 1973, which, with the exception only of Bolivia, is not the case of Latin America. This fact implied that the financial assistance to these Asian countries was mostly official and had motivations different from the ones that could be proposed in the case of Latin America.

One main difference with Japan and other Asian countries lies in the absence in most of Latin America of a well-structured tax system that could make the correction of fiscal imbalances more acceptable socially. I agree with the author that this is indeed a case where the Asian experience, like that of postwar Europe, is useful.

It is not true, however, that the World Bank has not asked for changes in tax structure as a way of correcting fiscal imbalances. Most of the SAL operations that I know of have the implementation of components of a modern fiscal system as an important part of the policy dialogue with the country. (Nevertheless, the Bank could do much more in terms of technical assistance in designing such systems and in improving the process of tax collection.)

The point is that this is a much harder condition to comply with than simply cutting expenditure, so much so that Professor Sachs mentions as the main budget reform undertaken in some Latin American countries the interruption of interest payments on foreign debt. Obviously, this constitutes short-term relief for the government budget, but by itself it doesn’t show any serious commitment to a permanent reduction of the deficit. All countries sooner or later abandon the state of fiscal chaos and give themselves a structured tax system. Then, the question to ask is what are the historical circumstances that brought those countries to such a fundamental decision? The answer would not necessarily single out the experience of Asian countries as more telling than others. Furthermore it might not be related to the current debt crisis in any particular fashion, except for the fact that the loss of private foreign credit, which is going to last for several years for the Latin American countries, could turn out to be an incentive to build the tax base necessary for badly needed investments.

The debt crisis is primarily a fiscal crisis, claims Professor Sachs, and I quite agree, though I am not so sure that the link between domestic government deficits and foreign debt is as direct as suggested in his paper. The overall deficit as a percentage of GDP for all the countries of the Western Hemisphere decreases from the maximum level of 6.7 percent in 1982 to 4.5 in 1984 and even lower in 1985, without a corresponding improvement in the debt-servicing capacity. One gets a roughly similar indication looking at individual countries. The fact that most Latin American currencies are not convertible implies that a lower domestic government deficit does not necessarily translate itself into a greater capability to service foreign debt.

The most effective way of securing the proceeds coming from trade surpluses, so that they can be channeled into servicing debt or into other productive uses, is the implementation of a set of capital controls, not dissimilar from the ones that were so common in some parts of Europe not long ago.

The fact that the “(Mexican) government owes the debt, but it does not own the net exports,” as Professor Sachs notes, should not constitute a problem. If a government so decides, it can exercise its authority mandating that part of exports remittances be deposited with the central bank, which would change them into an equivalent amount of local currency.

On this point, there is one further lesson that can be drawn from the countries cited by the author. All of them and many others that today are not in financial trouble had rigorous controls on capital movements and on the foreign borrowing that could be undertaken by the public and private sectors.

My final remark concerns a point of Professor Sachs’s paper that I like very much—its emphasis on maintaining or achieving an equitable income distribution as a prerequisite for sustainable adjustment. Policy advice is rarely wrong in its prescriptions, but it is often mistaken in its judgment of the social, institutional, and political constraints that ultimately determine its feasibility and its timing. Most of the countries that are of concern to us today need to accomplish or to maintain radical modifications in the structure of their economies so as to generate sizable net export surpluses. As we have seen, this can be achieved, in principle, either through a massive real depreciation of the exchange rate associated with trade liberalization, or through the pursuit of a more stable exchange rate policy, combined with the usually complex array of export subsidies and import tariffs. Sometimes the choice is presented as if it were between “good or bad” governments, the first being based on laissez-faire, the second on a set of active and protectionist policies.

The main merit of Professor Sachs’s paper is that it draws our attention to how superficial this way of reasoning is. Let’s not delude ourselves into thinking that the first route is better because it doesn’t require government intervention. To avoid inflation stemming from depreciations, monetary policy will have to be tight. To avoid unemployment at levels that are socially unacceptable in a democracy, the necessary decline in real wages will have to be negotiated through some social pact or income policy. Such bargaining is implicit in the second route, where one could look at the set of trade subsidies as the outcome of a negotiation among all the interested parties.

In both cases, the object of such negotiations, with different modalities in the various countries, is the change in income distribution necessary to generate the net export surpluses. One may venture to say that democracies choose the route where a social pact is easiest to achieve and to maintain. In general, the World Bank and the Fund have the responsibility only of pointing out the possible contradictions and mistakes within the socially agreed framework. The existence of an agreement bears witness that the adjustment is the outcome of a collective effort of the whole society—this is the main lesson of Professor Sachs’s paper—the kind of collective effort that we admire so much in the Asian countries to which he refers. In its absence, we know from the start that any adjustment, no matter which route is chosen, is not sustainable through time.

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